In anticipation of Berkshire Hathaway's upcoming shareholder meeting, Carolyn Bigda—contributing editor to Kiplinger's Personal Finance—screened Warren Buffett's major holdings to find those best-suited for dividend-oriented investors. Here, she reviews four favorites.
Steven Halpern: Our guest today is Carolyn Bigda, contributing editor to Kiplinger’s Personal Finance. How are you doing today, Carolyn?
Carolyn Bigda: I’m great, thanks.
Steven Halpern: With the annual meeting of Berkshire Hathaway coming up on May 2, you’ve written a special feature on some of Buffett’s favorite dividend paying stocks. Interestingly, you note that while Buffet is happy to collect dividends, he doesn’t like to pay them. Can you explain?
Carolyn Bigda: Yeah, he doesn’t like to hand out the cash to his investors, but he is happy to get the money from the company that he invests in.
He has said in shareholder reports and annual meetings that he just feels that he’s in a position where he can reinvest the money, so while he’s still at the head of Berkshire, he feels that he can do a better job of reinvesting the money than if he gives the cash out to shareholders and has them reinvest it on their own. That’s sort of his philosophy.
Steven Halpern: But as you said, Buffet likes to get dividends from companies he invests in and what you’ve done is look through his holdings and highlight four ideas that you find particularly attractive. What criteria were you looking for when assessing his holdings?
Carolyn Bigda: Sure, a lot of the stocks that he owns pay dividends, but it’s not his, sort of, primary focus. You know, he’s not focused on finding high dividend payers, so what we did was look for companies within his portfolio that had a pretty generous payout; something above the 2% that the S&P 500 yields today that also had a history of raising those dividends.
Steven Halpern: Now one stock you highlight that’s been in the news lately is General Electric (GE). What’s the attraction there?
Carolyn Bigda: Well GE has a pretty generous yield. When we last looked at it, it was about 3.6%, so that’s very good in today’s market.
Also, GE, you know, it struggled a lot during the financial crisis because of its financial arm, and over the last few years, the CEO has been really focused on sort of trimming down that part of the company and focusing more on the industrial segment but they’re doing quite well.
In fact, industrial revenues jumped 9% in the fourth quarter for GE and today the stock trades at a pretty reasonable level of about 15 times 2015 earnings. It’s not expensive, it’s, you know, sort of getting slim and trim and doing better at what it does best and also announced a 5% dividend hike in December.
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Steven Halpern: Now Buffet also holds shares in General Motors (GM), another company that’s faced its share of difficulties in recent years. What’s the outlook going forward?
Carolyn Bigda: Yes, GM struggled with the recalls and a whole host of issues, but is sort of getting back on track now and its cars are being well received. Consumer Reports, in fact, named the Chevrolet Impala and the Buick Regal among its top 10 picks for 2015, which is you know a pretty big mark.
Analysts think that the automaker’s earnings are going to grow by as much as 49% in 2015, so that’s pretty good. They’ve announced plans to increase dividend by 20% this year, so all-in-all, GM is getting there; on the road to recovery.
Steven Halpern: Another dividend paying Buffet’s stock is United Parcel Service (UPS). What’s the situation here?
Carolyn Bigda: Yes, UPS—as we all probably commonly call it—and it yields around 3% today, which again, is a nice healthy yield. The stock struggled a little bit because the holiday season didn’t, you know, it wasn’t as—I guess—a profitable time for the company.
They had to invest a lot of money in new technology and in personnel to make sure that packages arrived on time so that hurt earnings, but going forward, analysts think that that investment will pay off and that the company will get better at operating a little bit more efficiently as it uses this new technology and figures out just how many people it needs to have on hand for those busy holiday shopping seasons.
Steven Halpern: Now, finally, you highlight Verizon Communications (VZ), another Buffet dividend play. What’s the attraction with Verizon?
Carolyn Bigda: Telecoms traditionally pay very nice yields and this is no exception. Right now, it’s yielding around over 4%, so it’s very attractive in a low yielding environment such as today.
The company, like all wireless companies, has struggled a bit because there’s a lot of competition now between the big wireless giants in the US to attracting customers so they’re coming up with these new plans and contracts and slashing prices in some ways so that’s hurting earnings.
Even with all of that, analysts estimate that Verizon’s earnings will grow 10% this year, and again, you’re getting that big yield and the stock is pretty cheap. It only trades at about 13 times this year’s earnings. All in all, a pretty good package there.
Steven Halpern: Again our guest today is Carolyn Bigda. It’s always a pleasure speaking with you. Thank you.
Carolyn Bigda: My pleasure.
